- THG faces growing competition for nutrition products
- Earnings to be at lower end of expectations
- Slowdown in earnings growth for beauty arm
- Ingenuity e-commerce business could be demerged
“There always seems to be something holding back THG and this time it’s the nutrition arm which has acted as a drag on its half-year results,” says Dan Coatsworth, investment analyst at AJ Bell.
“Nutrition margins have been hit by clearance sales on products that don’t use its new branding, as well as inflationary pressures for whey which is a key ingredient for protein powders loved by fitness fanatics. Unfavourable foreign exchange rates have also weighed on earnings.
“While THG is excited about a range of new partnerships, there is no denying that nutrition is an incredibly competitive marketplace. With protein bars now taking up more space in convenience shops and supermarkets, you know they’ve gone mainstream and that means more big players trying to get a slice of the pie.
“THG’s model is to constantly offer large discounts on its products bought direct from its Myprotein platform, sneakily presenting them as short-term offers to entice shoppers. In doing so, it creates a disconnect between prices paid directly and those charged by external shops stocking its products. Regular online shoppers with THG might baulk at the higher cost of Myprotein items such as protein bars in their local shop and end up not buying at all.
“To its credit, Myprotein is one of the better-known brands in the market and that provides an advantage when trying to get shelf space and attract customers. But other providers are flexing their muscles with great success and getting in on the game.
“Earnings growth is slowing at THG’s beauty arm which is another mark against the company. You only have to look at Warpaint London’s latest results to see the beauty market is doing incredibly well, so it’s natural to question why THG isn’t racing ahead in this market.
“With guidance for full-year results to be at the lower end of the analyst consensus forecast, one might have expected this plethora of bad news to result in a significant share price sell-off. THG’s shares actually jumped in early trading as investors zoned in on news about a potential demerger of its Ingenuity e-commerce platform. However, the share price strength soon wore off.
“Ingenuity was pitched as a big opportunity for THG when it first joined the stock market, offering third parties a platform to sell products online and have all their orders and fulfilment handled by THG. It hasn’t quite lived up to the initial lofty expectations and so THG might set it free.
“Investors may be wondering if the business is worth significantly more as a standalone entity than bundled in with the broader THG group. There are plenty of unknowns regarding this separation such as how Ingenuity would be funded without the cash flow from the beauty and nutrition divisions, and whether it would be sold to a third party rather than listed on the stock market.
“THG’s miserable share price chart over the past five years would imply there may not be a big queue to own Ingenuity as a standalone entity and being sold to a private equity player with deep pockets seems a more logical route.”
